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India Ratings and Research (Ind-Ra) is India's Most Respected credit rating agency committed to providing the India's credit markets with accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open & balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade gaining significant market presence in India's fixed income market.
Ind-Ra currently maintains coverage of corporate issuers, financial institutions, which includes banks and insurance companies. Finance & leasing companies and managed funds, Urban Local Bodies and Project Finance.
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India Ratings Affirms City Union Bank at ‘IND A+’; Outlook Stable

India Ratings Affirms City Union Bank at ‘IND A+’; Outlook Stable

India Ratings and Research (Ind-Ra) has affirmed City Union Bank’s (CUB) Long-Term Issuer Rating and INR100m lower Tier 2 subordinated debt programme (reduced from INR400m due to maturity) at ‘IND A+’. The Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect CUB’s demonstrated ability to
manage its asset quality and its healthy capitalisation level, which is likely
to be sustained over the medium term. The prevailing economic environment is
likely to exert pressure on the bank’s loan portfolio, leading to a rise in
delinquencies. However, the agency believes its robust pre-provision
profitability provides a comfortable cushion to absorb expected increases in
credit costs.CUB is the sole lender to most of its non-individual
borrowers. Its control over its borrowers’ cash flows and largely secured
lending to small and medium enterprises have enabled it to significantly contain
deterioration in its asset quality till date (gross NPAs: 9MFY16: 2.4%; FY15:
1.9%). Ind-Ra expects CUB’s significantly overdue portfolio in FY16 to exert
pressure on its profitability. While its high geographical concentration in
Tamil Nadu (68% of its branches, 78% of deposits and 66% of advances) has
exposed it to the vulnerable textile and iron & steel industries, the bank
has resisted large-ticket lending, as reflected in its moderate single-name
concentration (top 20 advances to total equity was 59% against 100%-200% for
peers in FY15).CUB’s healthy Tier 1 capital (9MFY16: 14.7%; FY15:
16.03%; FY14: 14.43%) is also supported by a significant presence of regulatory
retail loans (risk weight of 75%) and agriculture gold loans (risk weight of
0%). Its equity-to-gross advances ratio was 15.2% in 1HFY16 (FY14: 14.7%), higher
than peers’ (9%-14%). The bank intends to maintain a somewhat higher level of capitalisation
over the medium term and has demonstrated ability to raise equity. Management
does not expect to require any equity or AT1 over the Basel III transition
period and Ind-Ra expects internal accruals to suffice for credit growth of
15-20% p.a.CUB’s pre-provisioning operating buffers are stronger
than peers’ (CUB: 9MFY16: 3.3%; median for peers: 1.9%), supported by wide net
interest margins due to its borrower profiles. Although credit costs have been
low till date and provision cover is lower than peers’, Ind-Ra expects these to
increase in FY16 and FY17 given the bank’s overdue but standard portfolio. Since
CUB’s provision cover is lower than peers’ (9MFY16: 38%; median for peers: 41%),
deterioration in asset quality can significantly affect profitability. However,
Ind-Ra expects the bank’s profitability (FY15 and 9MFY16 (annualised) Return of
average assets: 1.5%) to offer adequate cushion for any unforeseen asset
quality deterioration and believes the bank may not see erosion in equity.CUB’s funding profile is moderate, with limited access
to low-cost CASA deposits, due to limited franchises. However, the term
deposits are largely retail-based with a small proportion of deposits at
differential card rates. CUB’s liquidity profile is comparable with peers’ and it
has well-matched assets and liability tenors. The bank is concentrated in the
relatively highly banked state of Tamil Nadu. A key monitorable would be whether
CUB can protect its business market share in its home state against the
aggressive operations of small finance bank applicants.

RATING SENSITIVITIES

Positive: A sizeable
increase in franchises, reduced regional and sector concentration and improved
funding, while sustaining strong asset quality and profitability parameters,
could lead to a positive rating action.Negative: Any substantial
rise in slippages resulting in a sharp increase in credit costs with sharply
reduced profitability or capitalisation buffers, or a significant loss of
business to small finance banks, could lead to a Negative Outlook or even a
rating downgrade.

COMPANY PROFILE

CUB is a Tamil Nadu-based old private sector bank. It
has 491 branches across India (as at 9MFY16), of which about two-thirds are in Tamil
Nadu.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in.The
ratings above were solicited by, or on behalf of, the issuer, and therefore,
India Ratings has been compensated for the provision of the ratings.Ratings are not a recommendation or suggestion,
directly or indirectly, to you or any other person, to buy, sell, make or hold
any investment, loan or security or to undertake any investment strategy with
respect to any investment, loan or security or any issuer.

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